Rising rate cut hopes boost shares to 6-week high

Weaker than expected economic data failed to put a peg in the local sharemarket’s momentum, with equities kicking off the week at a near six-week high.

A deluge of retail, jobs and manufacturing data on Monday failed to dampen investor enthusiasm. Instead, the data reinvigorated expectations the Reserve Bank of Australia will cut interest rates at its December policy meeting today. Traders are pricing a 91 per cent chance the central bank will cut the cash rate by 0.25 basis points.

The S&P/ASX 200 Index rose 25.5 points, or 0.57 per cent, to 4531.5, underpinned by strength in the banks and defensive stocks. The market is now at its highest level since October 23.

“All of these economic releases indicate there is a slowing occurring in the domestic economy," said Patersons Securities strategist Tony Farnham. “Not surprisingly, from the numbers, the Australian dollar fell away. But it shortens the odds of some RBA action tomorrow, which is why the market has reacted so strongly. We have the view there will be a cut at the December meeting."

AFR
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The dollar is expected to be sensitive to any hints in RBA commentary that further cuts are on the horizon.

RBC Capital Markets currency strategist Michael Turner pointed to a week of significant data releases for the Aussie, with third-quarter GDP out tomorrow and unemployment figures due on Thursday. “If the RBA cuts, the Aussie will need a neutral statement if it isn’t to move too much, though if they don’t cut the bank won’t rule out further easing," he said.

The currency was trading at $US1.041 in afternoon trade on Monday. Mr Turner is predicting the currency to be at parity in 12 months’ time, suggesting the ongoing US economic recovery would see more strength in the US dollar and a correspondingly weaker Australian currency.

ANZ job ads were first cab off the data rank on Monday, recording a 2.9 per cent drop for November. This was the eighth straight monthly decline. “The trend in job advertising has continued to deteriorate," ANZ Bank head of economics and property Research Ivan Colhoun told clients. “Without a solid pick-up in the non-mining sectors as the mining investment boom winds back through 2013, the unemployment rate is set to drift higher to 5.75 per cent by mid-2013."

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October retail sales were also out. Sales were weaker than market expectations, rising only 0.2 per cent (expectations were for 0.4 per cent.) Company profits for the three months to September also recorded a 2.9 per cent fall. November house prices were unchanged, with a 1 per cent decline in Melbourne offsetting rises in other capital cities.

The retail figures in particular appeared to impact the consumer discretionary sector on Monday. Heavyweight David Jones closed 2 per cent lower at $2.44 while Myer Holdings shed 1.8 per cent to $2.13.

Other blue-chip stocks like Sydney Airport, Rio Tinto and National Australia Bank were also lower.

However, strength in most of the major banks and defensive stocks appeared to curb most of the weakness. Australia and New Zealand Banking Group and Commonwealth Bank of Australia in particular were stronger. ANZ rose 1.3 per cent to $24.69 and CBA rose 1.9 per cent to $60.81.

CSL and Telstra – both favourites with investors this year because of their high yield and defensive qualities – rose 2.4 per cent to $52.94 and 0.9 per cent to $4.35, respectively.